IRS Clarifies Taxability of Employee Benefits for Same-Sex Couples

Same-sex couples throughout the country celebrated the Supreme Court’s decision in US v. Windsor not only because it in many ways validated their relationships but also because it promised tangible tax and other financial relief afforded to married couples from which they had previously been excluded. But the decision, decided in the middle of the year, also created some unresolved questions for employers anxious to comply with the ruling. Many of the identified employment issues have been addressed over the last six months but some questions have remained and guidance continues to emerge.

In August, the IRS clarified that, for tax purposes, it will consider all same-sex couples as married provided the individuals were lawfully married under a state law, even if the married couple currently resides in a state that does not recognize the validity of the same-sex marriage. A month later the IRS issued Revenue Ruling 2013-61 that provided guidance on how employers could request refunds of payroll taxes paid on previously taxable benefits for a pre-Windsor same-sex spouse, now not taxable. Taking their lead from commentators and initial agency guidance, many employers by now will have ceased imputing taxable income on employees who paid for the cost of health insurance for a non-employee same sex spouse and employers will have taken steps to repay or reimburse the employee for any overpayments during the year.

Although the IRS appeared to have signaled how it would view the taxability of benefits from the employee standpoint, there has been no certainty until last week when the agency finally issued Revenue Ruling 2014-1. Thus, an employee covered by a cafeteria plan may now elect to pay the costs of health coverage for his/her same-sex spouse on a pre-tax basis through the plan’s salary reduction option. This rule will be applied to any plan with a plan year that covers December 16, 2013 (the date of the IRS ruling) and any years that remain open for the period provided for under the applicable statute of limitations, generally three years. The guidance, much of it in a question and answer format, lists examples and scenarios which will be helpful to employers trying to resolve outstanding issues in this area.

Similarly, employees are now permitted to claim expenses relating to a same-sex spouse under a Flexible Spending Account. Indeed, for a calendar year plan they may be able claim reimbursement for expenses back to January 1, 2013, six months before the Windsor ruling. And employees in a same-sex marriage who are covered by a health plan that permits them to fund a Health Savings Account (“HSA”) on a pre-tax basis may now increase their annual HSA contributions to the maximum permitted for married couples. For 2013 this annual cap is $6,450.

Last week’s IRS guidance is logical and consistent with the principal findings in the Windsor decision and with its own post-Windsor rulings. Nonetheless, conscientious employers who wish to ensure full compliance now have a comprehensive guidance to help them navigate this complex area.